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The focus of the week was squarely on politics. Locally, all eyes were on the discussion among GNU members about the composition of cabinet. Internationally, in the US, a debate between former President Donald Trump and current President Joe Biden took place last night. Biden visibly struggled to keep up. In Europe, polls suggest that a hung parliament is a likely outcome in the upcoming French election. At the same time, the Conservative Party is set to lose significant support in next week’s UK election. Protests in Kenya turned violent, with President William Ruto ultimately backtracking on its fiscal consolidation bill.
Back to SA, there was some expectation that President Cyril Ramaphosa would announce the cabinet of the seventh administration during the week. This did not happen, and it is unclear when the announcement can be expected. Indeed, the lingering uncertainty, ‘leaked’ letters and increased worries about whether the GNU would hold meant that the rand turned impatient and, gyrating with the news cycle, steadily lost ground against the US dollar. The rand is currently trading at about the same level to the dollar as just before the 29 May election, which is more than 40 cents weaker than this time last week. Such volatility in the rand is not unusual for the currency. Indeed, to be fair, the dollar is slightly stronger than it was at the end of May, and the rand has been weaker at times earlier in 2024 – but as higher local bond yields also show, the euphoria of last week has faded. In all, the rand depreciated by more than 2% against the dollar, euro and pound relative to last Thursday. The 10-year government bond yield rose back above 10% yesterday and was up by 34bps w-o-w.
Over the near term, the direction of SA assets will likely continue to move with the political news cycle. The ultimate announcement of the cabinet will be important, but of course, the government's ability to actually govern and the policy path pursued will be crucial in determining the long-term path of the economy and the attractiveness of SA assets. A briefing on Operation Vulindlela (OV) this week once again highlighted the necessity of structural reform to accelerate economic growth. Structural reform, however, does not bring quick wins (and may even cause some short-term pain). However, as a first step, a sincere commitment from the government to embrace a continuation of OV could be a real positive for confidence and improved sentiment could be really positive for the SA economy (even over the short term). The domestic section below unpacks the latest consumer confidence data for SA, which suggests that, while better than in the first quarter of the year, confidence remained decidedly negative in Q2 (the survey took place after the election).
Back to financial markets, the Japanese yen weakened to its lowest level against to the US dollar since 1986. The interest rate differential between the extremely low Japanese policy rate and the high US interest rate (and the expectation of no imminent cuts) is largely to blame. It is widely expected that Japanese authorities will attempt to intervene to provide some support. In commodity markets, worries about an escalation of the conflict in the Middle East put upward pressure on the oil price. However, this was capped by an unexpected rise in US fuel inventories. There is increased concern that the current strain between Israel and Lebanon’s Hezbollah could ignite and disrupt oil supplies from the region.
The first data for June will be of keen interest on the local front next week, kicking off with the Absa PMI and naamsa new vehicle sales on Monday. Both prints were poor in May, with uncertainty ahead of the election causing a ‘wait-and-see’ hold in demand. The May S&P Global PMI was slightly more positive in May, and the June release is due midweek. It is important to highlight that PMIs are not designed to be sentiment indicators, but, a better PMI reading would suggest that underlying sentiment is more upbeat amid improving business conditions (and vice versa). While the election outcome was known through June, there was (and is) still no clarity on the composition of the government that could have spurred a release of pent-up demand. However, the peaceful nature of the election and the continued absence of load-shedding could be positive. Indeed, without load-shedding the annual increase in electricity production for May (released on Thursday) should be positive.
Finally, the consumer inflation expectation survey for Q2 will be released on Friday (next week). The survey will provide more insight into the SA Reserve Bank’s (SARB) pursuit of having inflation expectations of price setters, in particular, drift lower to the 4.5% inflation mark.
On the global front, important data for monetary policy dynamics is expected. Today’s core PCE price data—the Fed’s preferred measure of inflation—will be important, as will a speech by Fed Chair Jerome Powell, the minutes from the latest meeting, and June jobs data next week. In the Eurozone, preliminary June consumer inflation data is due on Tuesday.
The upcoming UK election is unlikely to cause much additional market jitters as it is widely anticipated that the ruling Conservative Party will see a significant loss in support. The first round of the French election this weekend may cause more volatility, with French bonds already tracking higher amid concern about France’s fiscal trajectory going forward.
It is also a big sports weekend for SA; let’s hope that when the ICC Men’s T20 World Cup trophy arrives in SA, we have a cabinet to put it in…
The FNB/BER Consumer Confidence Index (CCI) edged up further to -12 in 2024Q2, after having improved from -17 to -15 index points in 2024Q1. The latest consumer confidence reading is the highest in 18 months (since 2022Q4, when the CCI reached -8) and points to a gradual improvement in consumer spending compared to the very weak performance recorded over the last year. A breakdown of the CCI per household income group shows that the slight improvement in overall confidence was driven by an uptick in the confidence levels of middle- and low-income households. However, the confidence levels of high-income households remained unchanged at -14 during the second quarter.
Source: BER
Looking ahead, consumer sentiment and spending could improve further. The second quarter CCI survey was conducted between 3 and 14 June, after the national election results were declared but before the configuration of the government of national unity (GNU) was finalised. Slowing inflation and potentially lower borrowing costs could help with sentiment and boost consumer spending in the second half of the year.
Stats SA’s latest Quarterly Employment Statistics (QES) revealed that formal non-agri employment continued to fall in 2024Q1. Following a 194 000 decline in 2023Q4, employment decreased by another 67 000 to 10.66 million at the end of 2024Q1. The biggest drag were trade, community services, and business services sectors, while manufacturing, transport, and construction added somewhat to the overall numbers. On an annual basis,7 4 000 (-0.7% y-o-y) fewer individuals were employed in 2024Q1 compared to the same period in 2023.
Indicative of a consumer under pressure, average monthly earnings increased by only 4.7% between February 2023 and February 2024, which is lower than the 5.4% average annual CPI inflation rate experienced in 2024Q1. This means that in real terms, income declined over the past year.
The SARB’s leading business cycle indicator rose by a substantial 2.4% m-o-m between March and April 2024, marking the sharpest monthly increase since April 2021. On a yearly basis, the indicator increased by 1.8%, a welcome development following the overall decline of 2.2% in the first quarter of 2024.
Annual producer price inflation (PPI) for manufactured goods in May came in at 4.6% y-o-y in May 2024. This marked a deceleration from the six-month high of 5.1% y-o-y recorded in April 2024. This trend is promising for the continued decline in overall CPI inflation.
Other noteworthy data for May, including the money supply, private sector credit, the trade balance, and the monthly budget balance, will be released later today.
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A slew of flash PMI data was released since the previous weekly publication. In the US, the flash composite PMI rose to 54.6 in June, the highest level in over two years, slightly up from 54.5 in May. This increase was broad-based, with the service sector contributing the most to overall business activity growth. On a positive note, selling price inflation moderated to a five-month low in June, reflecting a slowdown in input cost increases. The moderation offers some relief to the US Federal Reserve, suggesting that consumer price pressures may ease on a sustained basis, potentially allowing for an interest rate cut before the end of the year.
Across the Atlantic, the preliminary UK composite PMI fell from 53 in May to 51.7 in June, indicating a slowdown in economic growth at the end of the second quarter. Overall business activity in the UK was dragged down by a loss of growth momentum in the service sector, offsetting the strong performance in the manufacturing sector. Concerningly, both purchasing and selling prices in both sectors increased at a faster pace in June, indicating that the recent deceleration in the UK consumer inflation to the 2% target may not be sustained.
In the EZ, the composite PMI surprised on the downside, although remaining above the 50-point neutral mark. The headline PMI fell from 52.2 in May to 50.8 in June. Growth in overall business activity was driven entirely by the service sector, while manufacturing lost momentum after two months of improvement. A concerning development was the decline in new export orders for the first time in four months amid rising trade tensions between the EU and China.
The largest economy in the EZ, Germany, continues to signal a recovery in economic growth, albeit at a slower pace, mainly due to a sharp deceleration in manufacturing production. Worryingly, Germany’s Ifo business climate index also indicated a weakening in manufacturing, falling to 88.6 in June from 89.3 in May.
Editor: Lisette IJssel de Schepper
Tel: +27 (21) 808 9777
Email: lisette@sun.ac.za
Click here for previous editions of this publication.
Please refer to the glossary on the BER website for explanations of technical terms.
Friday, 28 Jun 2024
